Every year thousands of people head to Omaha in Nebraska in the United States to attend Berkshire Hathaway’s annual shareholders’ meeting (AGM) – mainly to draw on the investment experience and expertise of 94-year-old Charlie Munger and 87-year-old Warren Buffett. Forty of the approximate 40,000 people who attended this year’s meeting were part of the annual group of investors and investment professionals who joined Denker Capital in Omaha. Two of them share their stories here.
Investment lessons from the Berkshire Hathaway AGM
Dr Michael Streatfield, CFA®
Chief scientist and founding partner at FVC Advisors
Put Berkshire Hathaway on your bucket list.
What’s on your bucket list? Some for me: Vegas in spring break? Ticked. Playing with giant rock cod in the Great Barrier Reef? Yep, ticked. Ocean cruise? Planned for November this year.
Going to a certain company’s AGM has been on my bucket list my whole life as a professional investor. ‘What?’, you ask. Aren’t shareholder annual meetings a terribly dry ‘Mr Chairperson, I second that. We now propose section 1.2.’ whatever, snooze fest? No. Not this one.
What I want to share in this article is the incredible atmosphere of this AGM, and the sheer wisdom and life lessons of Buffett and Munger. And finally, fellow investors, I encourage you to add this experience to your own bucket list, and to go sooner rather than later, as these old boys are in their twilight years. (I must thank Denker’s very own Kokkie Kooyman, an uber-experienced guide, with 19 Omaha visits under his belt, who made it so easy.)
Sure, you can catch the live streaming of the AGM proceedings. (Since 2016 the event is open to the world through Yahoo Finance.) But you will miss the sheer spectacle of the event and the incredible atmosphere of the enormous community of investors. My feelings about the scope of this event are hard to convey. Imagine the biggest concert you have been too, with seats filled to the rafters. There are huge queues outside, but it’s 6am (not pm!) and those waiting in line are a little bit older than the last gig you went to. The humorous video (only ever screened once) before the AGM is also a treat. (Buffett and Munger star in them and the once-off showing means they get big names to star with them. This year we had Munger being timed to open a box of his favourite peanut brittle while at a board meeting, and Buffett being trained by Arnie [Arnold Schwarzenegger] to take on Floyd Moneybags Mayweather.) But more seriously, the reason to be there is that this is investment hallowed ground.
Investment lessons from the Berkshire AGM – what I didn’t appreciate before.
With an utterly enviable 50-year record (20% per year compounded for 52 years), Munger and Buffett’s investment acumen commands sheer respect; but this belies their jovial nature, and cheerful peanut brittle and Cherry Coke swigging at the AGM.
I list a few of the elements that deepened my understanding of Berkshire Hathaway and what drives its success. Just as if you were going on your own bucket list adventure, here’s what you would need on your trip:
1.Pack a timeless book
Berkshire Hathaway as a company has morphed over time, but some investment principles are enduring. Buffett is quoted as saying Benjamin Graham’s book, Intelligent Investor, was the best investment he ever made. Graham, the father of deep value investing, was Buffett’s mentor. It was a great foundation, but Buffett extended the thinking and pivoted from very cheap, low-quality companies, to enduring companies, with better quality (even if one needed to pay a bit more). Even today Buffett in the AGM this year mentioned this book and urged that Chapter 8 (The Investor and Market Fluctuations) and Chapter 20 (Margin of Safety) were memorable.
2.Learn from history
Munger and Buffett reminded us to invest despite the headlines, and the power of then being patient. Buffett showed a newspaper from 1942 when he was 11 and made his first investment. The front page was all doom and gloom about the war, but few would predict how successful an investment in America would go on to be. There is always a reason not to invest, but compounding over time is at the heart of Berkshire Hathaway’s success.
3.Buy a castle or two
I mention castles, as Buffett and Munger believe in the power of moats. Moats are business advantages that protect a business, such as brands or monopoly power. They cement a company’s earning power and shield them from competition. Buffett was humble about not investing in Google, but to him it was hard to appreciate how secure Google’s moat was, given they had come from nowhere so quickly (so another technology company back then could sidestep them, just as they had stepped over others like Netscape). A throwaway comment from Buffett sticks in my mind: ‘You need to assess the probability of the durability of competitive advantage to improve your odds of being a successful investor’.
4.Keep plenty of cash
Every holiday needs spending money. Berkshire Hathaway is known to be ‘cash generative’ (I won’t go into float here), but the sheer scale of this is mindboggling – $400 million of cash generation a week! This provides plenty of opportunity to do deals once market valuations subside to more sensible levels.
This trip made me appreciate Berkshire Hathaway as a counter-cyclical investment to balance one’s portfolio. By this I mean they hold more cash while the market is expensive and deploy when the market is cheap, which counterweights broader market shocks.
With cash you can always make more. Buffett mentioned they see the value of Apple rising from their 5% stake to 6% or 7% through buybacks. As an investor in Berkshire Hathaway, there has been concern about the margins on non-insurance businesses. Reading between the lines it seems the acquisition of high-margin Precision Castparts, driven by the tough CEO Mark Donegan, is a critical acqui-hire for Berkshire. They mentioned Donegan has been talking to other businesses, and I suspect he might help squeeze even better margins, and even more cash, from Berkshire Hathaway in the future.
5.Take a good friend along for the journey
A long journey is made so much easier with a great companion at your side. It is hard to imagine separating the success between the warm Buffett and the cynical Munger. Being able to share investment thoughts and have these thoughts challenged has sharpened the pair’s investment thinking. Being humble and open-minded is a lesson for us all.
But Buffett and Munger have not only built a solid partnership; they have also built a great community. Every shareholder is treated equally. There is no special seating at the AGM. These two freely share their valuable investment thoughts in their annual reports and at their AGM, where they welcome questions from everyone.
It makes one realise that, on the road of life, it is about more than ticking off your dreams and goals; one must enhance the value of the ‘intangibles’ on your life’s balance sheet. The deeper idea here is: what are you giving back?
I urge you to take the trip.
Take the trip to appreciate the legacy of these two people who are deeply passionate about investing, their businesses and their shareholders. These two will no doubt die on the job rather than retire (but the daily McDonald’s breakfast, and snacking on Cherry Coke and peanut brittle is doing a great job of pickling them). I wish them many more years ahead – for their sake and for the sake of their investors.
Wisdom from the sages of Omaha
Wealth manager at PSG
Buffett and Munger’s clarity of thought and the knowledge they shared astounded me.
What struck me the most from this experience wasn’t the effort people make to attend this annual meeting, but to have the opportunity to see the oldest, most successful investors of our time and to experience their wisdom first-hand. Although the meeting started at 9am, we were already standing in line at 6am to find good seats in the stadium. Buffett and Munger spent six hours answering any question from shareholders on their business, as well as their personal views on investments, philosophies, and politics. I would like to share some of the most important wisdoms at the meeting:
Whether they also sometimes make mistakes and invest in the wrong companies?
‘We do a lot of dumb things in this world.’ (Buffett)
On avoiding mistakes:
‘An ounce of prevention isn’t worth a pound of cure, it’s worth a ton of cure.’ (Buffett)
About buying and keeping a company without trying to interfere:
‘The CEO of one of our companies . . . I’ve talked to him maybe three times in the last ten years. And he’s done quite well. He may have done even better if I hadn’t talked to him those three times.’ (Buffett)
Regarding rising healthcare costs:
‘In 1960 we [the United States] were spending around $170 per capita on healthcare. Today we spend $10,000 per year per capita.’ (Buffett)
On how difficult it is to find a good investment:
‘It’s not easy.’ (Munger)
About mixing politics and business:
‘I don’t believe on imposing my own political beliefs on the business.’ (Buffett)
Should they be looking for better and alternative strategies?
‘As long as the existing system continues to work as well as it has, why would we change?’ (Munger)
Are they able to change their opinions?
Munger: ‘If the conditions change, we are capable of changing our minds.’
Buffett: ‘Yes . . . We have done that many times.’
Munger: ‘Yes . . . although I must say, it’s quite hard.’
In response to several questions from a particular shareholder:
‘The answer is; I don’t know.’ (Buffett)
What role does luck play?
‘We’re all a bunch of undeserving people, I hope we continue to be so.’ (Munger)
On keeping things simple and not doing unnecessary things:
‘We don’t do unnecessary things at Berkshire. And there are many things at big companies that are unnecessary.’ (Buffett)
Views on appointing people and empowering them to make important decisions:
‘I think decisions get made better if you eliminate the bureaucracy. Bureaucracy is sort of like a cancer.’ (Munger)
‘If we fail, I hope somebody else succeeds.’ (Munger)
How to become wealthy from investing?
‘Just be patient.’ (Buffett)
About how much money Berkshire Hathaway makes:
‘About $400 million comes into Berkshire Hathaway each week, which is quite comfortable.’ (Buffett)
How to build a successful business:
‘Surprise and delight your customers. There is nothing like that in business. If you delight your customers, you’re a long way home.’ (Buffett)
‘If you’re going to live a long time, you have to keep learning. What you formerly know is not enough, if you don’t adapt, you are like a one-legged man in an ass-kicking contest.’ (Munger)
Whether Bitcoin is a good investment?
‘It is worse than rat poison.’ (Munger)
Furthermore, I learnt that we should not misuse old age. By that I mean that we must contribute to our community as long as we are able to, and that we are robbing society of knowledge and wisdom if we retire too early to watch the waves.
A closing word from the trip leader, Kokkie Kooyman
Buffett’s and Munger’s timeless wisdom is what makes the Omaha experience worthwhile.
Wisdom is like investments. The compounding effect that time makes possible is staggering – and Buffett and Munger are living proof of this. I keep going back to Omaha because I really enjoy their ability to simplify complex and challenging concepts. The meeting doesn’t produce new principles, but they are remarkable in their ability to apply their time-tested principles to current problems. I have taken the liberty of sharing my favourite anecdote from this year’s meeting below.
The power of making fewer decisions, and investing in productive assets.
The Pearl Harbor attack in 1941 caught the United States totally unawares, and on 11 March 1942 their forces were withdrawn from the Philippines. There was bad news everywhere that day, and markets were down significantly. Had you invested $10,000 in an index fund on that day in March 1942, it would be worth $51 million today. Had you invested the same $10,000 in gold, it would now be worth $400,000.
Buffett used this comparison to illustrate that when investing in businesses for the long term, you just had to make one decision based on your view of how American businesses would do over your lifetime. If you’d made the right decision in 1942, you would have done very well without ever lifting a finger again. On the other hand, he made the point (again) of the folly of speculating on non-productive assets like gold and cryptocurrencies. While productive assets (like businesses) grow in value along with the income stream they produce, non-productive assets don’t produce anything, so they won’t deliver anything other than supposed scarcity. According to Buffett, ‘Anytime you buy non-productive assets, you are counting on someone buying it later from you at a higher price. It always comes to a bad ending . . . cryptocurrencies will come to bad endings.’
Lastly, on the type of companies that are the best investments and lessons learnt.
Buffett said, ‘We want to own products where people feel like kissing you when you give it to them.’ This reminded me of his statement last year on what strategy is best – buying turnarounds or successful businesses like See’s Candy. He had said, ‘Our See’s Candy purchase was thanks to lessons learned from early stupidities. We bought businesses because they were cheap, but they were cheap because they needed fixing, and we were stupid thinking we could fix them.’
Michael Streatfield and Marius Kruger have contributed to this article in their personal capacities.
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